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Special Drawing Rights back on the agenda during the coronavirus pandemic

Summary:
Cometh a crisis and cometh need for a global currency. IMF started a neutral global reserve currency named Special Drawing Rights (SDR) in 1969. However, the idea barely took off. In each crises, the discussion over having a neutral global currency picks up but is soon forgotten. This time is not any different. Marushia Li Gislén and Maria Kangas in this paper review history of SDR and what could be done to increase its usage in global economy: The Special Drawing Right (SDR) is an international reserve asset created by the International Monetary Fund (IMF). An SDR involves a potential claim on the foreign exchange (FX) reserves of IMF member countries, but it is not a currency in itself and can only be used by countries and international organisations. A trading agreement for the

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Cometh a crisis and cometh need for a global currency. IMF started a neutral global reserve currency named Special Drawing Rights (SDR) in 1969. However, the idea barely took off.

In each crises, the discussion over having a neutral global currency picks up but is soon forgotten. This time is not any different.

Marushia Li Gislén and Maria Kangas in this paper review history of SDR and what could be done to increase its usage in global economy:

The Special Drawing Right (SDR) is an international reserve asset created by the International Monetary Fund (IMF). An SDR involves a potential claim on the foreign exchange (FX) reserves of IMF member countries, but it is not a currency in itself and can only be used by countries and international organisations.

A trading agreement for the exchange of SDRs to conventional currencies forms the basis of the SDR system, which makes access to SDRs particularly important for countries whose own currencies may not be viable on the FX market. SDRs are issued to IMF member countries in proportion to their participating interest in the IMF. Sweden’s current allocation is SDR 2.25 billion, corresponding to just over SEK 30 billion at today’s exchange rate. Sweden is one of 32 countries that have entered into voluntary currency trading arrangements with the IMF.

In the Economic Commentary “The Special Drawing Right – its role as a reserve currency, the Riksbank’s experience and the way forward”, the authors go through different aspects of the SDR and discuss the future of the system. A new SDR allocation would enable countries that do not have access to liquidity from other sources to obtain foreign currency – above all US dollars. However, the lack of review and conditions in SDR trading makes it difficult to understand how this money is used. This is important to the Riksbank, as an expansion of the system could lead to an increase in the bank’s FX trading. If the role of the SDR is expanded, as is often proposed, the SDR system will have to be strengthened and the risks openly discussed and resolved.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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